America’s Car-Mart, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended October 31, 2013. Unless otherwise stated, financial amounts are in millions of dollars. Comparisons are with the corresponding prior-year periods; balance-sheet comparisons are with April 30, 2013.
Business context
America’s Car-Mart sells older-model used vehicles and finances substantially all customer purchases, serving primarily customers with limited or impaired credit histories. It operated 129 dealerships at October 31, 2013, primarily in the South-Central United States. The filing is unaudited interim reporting; management cautions that six-month results are not necessarily indicative of the full fiscal year.
Financial and operating results
| Metric | Three months ended Oct. 31, 2013 | Six months ended Oct. 31, 2013 |
|---|---|---|
| Total revenue | $121.4; up 10.2% | $244.0; up 10.8% |
| Sales | $107.8; up 9.7% | $216.9; up 10.4% |
| Interest income | $13.7; up 13.6% | $27.1; up 14.0% |
| Net income | $5.8, versus $7.3 | $13.3, versus $15.4 |
| Diluted EPS | $0.61, versus $0.76 | $1.40, versus $1.59 |
| Provision for credit losses | $28.3; 26.3% of sales | $54.8; 25.3% of sales |
For the six months, gross margin was 42.2% of sales, down from 42.8%; net income margin was approximately 5.5% of total revenue, versus 7.0%. The quarter’s net income margin was approximately 4.8%, versus 6.6%. Retail units sold rose 8.6% for the six months, while average retail selling price increased 2.3% to $9,773. Six-month same-store revenue increased 4.6%.
Cash flow and liquidity: Six-month operating cash flow was $1.2, investing cash outflow was $4.0 (primarily property and equipment purchases), and financing cash inflow was $2.9. Cash increased $0.1 to $0.3. Net finance receivables were $308.1, up from $288.0 at April 30; inventory was $30.2, down from $32.8.
Revolving debt was $101.7, compared with $99.6 at April 30. The $145.0 credit facilities mature in June 2016 and carried a reported rate of LIBOR plus 2.25% (2.42% at October 31). The company reported approximately $41 of additional borrowing availability and compliance with covenants. A 1 percentage-point increase in rates on outstanding debt would add approximately $1.0 of annual interest expense.
Material changes and management commentary
- Revenue growth reflected new dealership contributions and same-store growth, as well as higher interest income. Dealerships open at period end increased to 129 from 117 a year earlier.
- Profitability weakened despite revenue growth: six-month pretax income declined 13.9%. Credit-loss provision increased 21.0%, faster than sales, and cost of sales and SG&A also rose as percentages of sales.
- Net charge-offs were 13.1% of average finance receivables for the six months, versus 12.4%. Collections as a percentage of average receivables fell to 27.3% from 29.4%; receivables more than 30 days past due rose to 4.7% from 4.3% a year earlier.
- Management attributed pressure on collections and losses to increased loss frequency, longer contract terms, more modifications, lower collections, competitive conditions and customer economic pressures. Average portfolio term, including modifications, increased to 29.5 months from 28.3 months.
- The allowance for credit losses was $80.7, or 21.5% of principal balance less unearned payment-protection revenue. Management identifies this allowance as a significant estimate; a 1% change in the allowance as a percentage of receivables would change pretax results by approximately $3.8.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects near-term gross margin to remain generally in the 42% range and anticipates credit losses to be somewhat higher than historical ranges. It expects finance-receivable growth to exceed revenue growth as contract terms increase.
- Management expects approximately $6 of property and equipment purchases over the next 12 months for dealership additions, refurbishment and expansion, and states it believes liquidity will be adequate for foreseeable needs.
- Key risks include subprime customer credit and collection performance, competition and longer/lower-down-payment contracts, vehicle supply and purchase costs, inflation and employment conditions, availability of credit facilities, and consumer-finance regulation. Seasonal sales and collections can also shift with tax-refund timing.
- The company had no interest-rate swap in effect. Approximately 80% of dealership and office properties were leased; operating leases are the principal disclosed off-balance-sheet arrangement.
- The IRS completed its fiscal 2008–2009 review under a negotiated settlement in January 2013; the company says related interest was immaterial. IRS audits of fiscal 2010 and 2011 federal returns were ongoing. The company also discusses tax risks related to intercompany receivable sales and the related tax treatment.
Important facts for investors to verify
- Whether rising delinquencies, lower collections and higher charge-offs persist, and whether the $80.7 credit-loss allowance remains adequate.
- Whether longer customer contract terms and competitive pressure continue to increase receivable growth and weaken liquidity or credit performance.
- Available borrowing capacity, covenant headroom and refinancing plans ahead of the June 2016 facility maturity.
- Results and potential effects of the IRS audits, and the durability of the tax treatment of intercompany receivable sales.
- Whether planned dealership investment and expansion deliver revenue growth without further margin or credit-quality deterioration.